Graph 1 Net worth as a Percentage of GDP
That
got me thinking again about the issue of whether consumption spending
is determined by income or wealth. Specifically, if consumption is
determined by wealth, there should be peaks in consumption corresponding
to the dot-com and housing bubbles shown on Graph 1. However, as Graph
2 shows, there were no such peaks.

Graph 2 Personal Consumption Expenditures

I've argued already that, contrary to standard economic thought, consumption is directly determined by income. (Posted at RB and at AB.)
One observation was that consumption, as a fraction of income, didn't
vary much over time, averaging 90.1% with a standard deviation of 2.1%.

I took a similar look at consumption and net worth,
data from Fred. The next three graphs show personal consumption
expenditures (PCE) as a decimal fraction of net worth (blue, left scale)
along with net worth (NW) (red, right scale) over different time spans.

Graph 3A Expenditures/Net Worth and Net worth, 1959-79,
Graph
3A spans from 1959 - the beginning of the data set - to 1979. Net
worth rises exponentially as the population grows. Adjusting for
population growth does not change the shape
of the net worth curve, so, in the aggregate, we were becoming richer
during those years. Note that PCE/NW follows a generally similar,
though far bumpier trajectory. As I pointed out in the prior post, the personal savings rate also increased during this period, so the average worker was able to both save and spend more.

Graph 3B Expenditures/Net Worth and Net worth, 1975-90
Graph
3B spans from 1975 to 1990. Net worth continues on its exponential
track. But, after about 1979, PCE/NW drops, reversing the prior trend.
By 1990, PCE/NW is no greater than it was in the early 1960's.
Meanwhile, the personal savings rate also dropped - to a range below
that of the early 60's.

Graph 3C Expenditures/Net Worth and Net worth, 1989-2011Graph 3C spans from 1989 through October, 2011. The exponential
growth of net worth falters before and during the two most recent
recessions. After about 1994, PCE/NW is a roller coaster ride. Of
particular interest is the exactly contrary motion at a detail level
between NW and PCE/NW, after about 1998. During the housing bubble of
mid-last decade, PCE/NW hit an all time low.

What narrative makes sense of these three graphs? Here's my attempt.

Through
the 60's and 70's, the standard of living was increasing, as incomes
and net worth rose together. This allowed more discretionary spending,
and therefore, the fraction of NW that was spent increased.

In
the 80's, aggregate net worth continued to rise, but consumption
spending, quite dramatically, failed to keep pace. Lane Kenworthy has
repeatedly pointed out that middle class income growth has decoupled from general economic growth
as the upper income percentiles have captured an increasing slice of
total income. As the wealthy grew wealthier and the middle class fell
behind, the fraction of NW that was spent declined - exactly the
opposite of what should happen if increasing wealth determined
spending. But exactly what should happen if increased wealth is
diverted to the already wealthy who have less of a propensity to
consume.

During the 90's, growth in median family
income and GDP per capita were close to parallel (see graph at the
Kenworthy link) so there was a lull in the decoupling. For most of
that decade, PCE/NW was close to constant at 0.18-.19. But while
spending was kept level, the personal savings rate continued to fall.

During
the current century, median family income has flat-lined, while
GDP/Capita has continued to increase. The decoupling has resumed and the
wealth disparity has widened. During the two wealth bubbles, PCE/NW
declined dramatically. When the bubbles burst and net worth declined,
PCE/NW increased back into the 0.18-.19 range. Most strikingly, from
about 1998 on, the two lines in graph 3C exhibit exactly contrary motion
at a detail level.

Conclusions:

There
was a tight relationship between Net Worth and consumption through the
60's and the 70's, when earnings growth kept up with GDP and wealth
disparity was slight by current standards.

This
relationship broke down during the 80's - though one could argue as
early as the mid 70's - as aggregate wealth and working class income
decoupled.

Most recently, the relationship between NW
and PCE/NW is inverse. The big swings in NW that the bubbles provided
also demonstrated that consumption spending does not depend on net
worth.

As I indicated in the earlier post linked above,
consumption spending does depend on disposable income, throughout the
entire post war period. A simple look at readily available data casts
grave doubts on the idea that wealth, and not income, determines
consumption spending.

For the longer perspective, here is the data of Graphs 3 A-C on a single graph.

Graph 4 Expenditures/Net Worth and Net worth, 1959-2011
In part 2, we'll look at how spending and Net Worth correlate.